How to save money on mortgage payments
There are lots of ways to save LOTS of money on mortgage payments. All you gotta do is work with an agent who understands creative financing as a means of lowering payments. One of my favorite techniques is an interest rate buydown.
If you're a seller, we might use a buydown as a means of getting more showings, and a quicker sale. If you're a buyer, we might just negotiate with the seller to buy down your interest rate as an incentive to buy his home.
Here's an example of a 3-2-1 buydown. It's a great way to buy a home if you expect your income to rise over the next few years, and you don't want the risk of a variable rate loan.
3-2-1 Buydown Illustration
A 3-2-1 Buydown enables buyers who would usually be looking for a lower-priced home to afford the payments on a more expensive home. We can often negotiate with the seller, to achieve a 3-2-1 buydown as a buyer incentive.
Let's look at an example - a $200,000 home, where we negotiate a $10,000 buyer incentive for a 3-2-1 buydown.
The payment for a $200,000, 30-year fixed rate mortgage at 6-3/4% is around $1,300 per month. We're assuming "zero down" for this illustration.
With a 3-2-1 buydown on a 30 year fixed mortgage, the interest rate is bought down 3 percentage points in the first year, 2 points in the second year, and 1 point in the third year. Years 4 through 30 are at the original interest rate. Typically, a 3-2-1 buydown will cost about 5% of the sale price - in this example, about $10,000.
Let's look at the payments on that same $200,000 mortgage, with a 3-2-1 buydown on a 30-year fixed mortgage at 6-3/4%
Year 1: $926 per month. $374/MONTH LOWER!
Year 2: $1,043 per month. $257/MONTH LOWER!
Year 3: $1,167 per month. $133/MONTH LOWER!
Years 4-30: $1,300 per month.
Note that a $926 monthly payment will get you only around $143,000 on a 30-year fixed mortgage at 6-3/4%. In this example, it buys you a $200K home!
A 3-2-1 buydown might be a good choice, if you expect your income to grow steadily over the next few years. As the illustration shows, the payment increases in years 2 through 4 by about $120 to $130 per month.
Typically, lenders will qualify the buyer on his ability to make the first year's payment. So, if you qualify for a $143,000 30 year fixed loan, you'll most likely qualify for a $200,000 loan where a 3-2-1 buydown is offered.
AND ANOTHER IMPORTANT THING!
Most people don't realize this great money saver: for every $3,000 per year of tax-deductible expense, you can take another exemption on your W-4. Mortgage interest and property taxes on your primary residence are generally tax deductible expenses. So, in this example, it's legal for you to take as many as 4 additional exemptions - which may lead to as much as $300/month additional take-home pay!